Determine the better of the two alternative using the present worth analysis. Use an interest rate of 10%. Alt. X Alt.Y Initial cost $12,500 $8,900 Annual benefit $6,800 $2,000 Salvage value $5,000 $8,900 Life in years 2 years 3 Years MARR 10%
Determine the better of the two alternative using the present worth analysis. Use an interest rate of 10%. Alt. X Alt.Y Initial cost $12,500 $8,900 Annual benefit $6,800 $2,000 Salvage value $5,000 $8,900 Life in years 2 years 3 Years MARR 10%
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:### Present Worth Analysis for Investment Alternatives
In this exercise, we will determine the preferable alternative between two investment options using a present worth analysis, with an interest rate set at 10%.
#### Data Table:
| Criteria | Alternative X | Alternative Y |
|------------------|---------------|---------------|
| **Initial Cost** | $12,500 | $8,900 |
| **Annual Benefit** | $6,800 | $2,000 |
| **Salvage Value** | $5,000 | $8,900 |
| **Life in Years** | 2 years | 3 years |
| **MARR (Minimum Attractive Rate of Return)** | 10% | 10% |
### Explanation:
- **Initial Cost**: This is the upfront investment required for each alternative.
- **Annual Benefit**: The expected annual profit generated by each alternative.
- **Salvage Value**: The residual value of the investment at the end of its life.
- **Life in Years**: The duration over which the investment will generate returns.
- **MARR**: The minimum rate of return acceptable for the investment, used as the discount rate for present worth analysis.
The goal is to calculate the present worth of each alternative to determine which one offers a higher net present value, making it the preferred option under the given financial conditions.
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